Board Evaluation: The Key Drivers & Pitfalls

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DebraBrown2By Debra Brown – Founder, President and CEO of Brown Governance Inc

 

 

Directors don’t want to waste time, money or other resources on an exercise in futility. So, when it comes to board evaluation, they have mixed reactions.

Some directors embrace it as the positive, value-added experience that a good evaluation can be. Some either want to rush through it or treat it as an exercise in compliance and simply ‘tick the boxes’. Others, who may have had a ‘bad’ experience with evaluation, consider it a waste of time or just don’t think they need it. These ‘bad’ experiences are almost always linked to one or more of these:

  1. The drivers – the board hasn’t taken the time to fully understand why they are conducting the evaluation in the first place and to identify what they are hoping to accomplish as a result.
  2. The pitfalls – inexperience and lack of independence of those leading the process means that they either ignore the pitfalls or they don’t know enough to recognise and avoid them.
  3. The processes – there are a variety of approaches and processes for conducting board evaluations. Each of these tools is suited to differing drivers, boards, situations and circumstances. Using the wrong tool for the job is like using a hammer when a screwdriver is needed. It just won’t do the job.
  4. The results – board evaluation results are meant to provide impetus for positive change and correction. Conducting the evaluation is not enough – this is only the diagnostic – the real value is added by acting on the results.

The drivers

Board evaluations are undertaken for a variety of reasons.

Accountability and compliance: This is the most basic driver. The 2002 to 2003 governance reforms mandated annual board evaluation for publicly-traded companies in the US and mandatory ‘comply or explain’ standards in Canada, leading to rapid and wide adoption of the practice. These compliance guidelines are an accountability mechanism designed to ensure the board and directors are fulfilling their legal and governance responsibilities.

Audit and assurance: Another basic driver is to provide assurance to the board itself, shareholders, affiliates, regulatory bodies and other stakeholders of the depth, breadth and effectiveness of the organisation’s governance practices. Conducting a comprehensive governance ‘best’ practices audit is a tangible means to identify and deal with the strengths and weaknesses of governance structure.

Informing the renewal process: Using board evaluation to provide input to the board renewal process is another driver. This one must be approached with caution and expertise since, if handled poorly, it can quickly lead to winners, losers, division and rancour. Done well, directors are exhorted to higher degrees of engagement and better understand the value they add.

Education and awareness: You might want to build awareness of and educate on, the expectations of the board and individual directors. By simply asking questions, participants gain a more fulsome awareness of what is being asked of them in terms of their roles and responsibilities. Another benefit is identifying skills gaps and, therefore, training and development opportunities.

Continuous learning and growth: Promotion of personal and corporate growth drives many organisations to embrace evaluation. Performance standards are set and raised over time and compared against peer organisations and directors in order to measure and reach for growth in performance.

Communication, understanding and commitment to priorities: The evaluation process can be used as a communications mechanism. Processes are designed to open up lines of communication among directors and with management, towards the goal of building unity and trust, combined with a desire to reach consensus and commitment from all directors on the board’s priorities.

Value added, positive change and mission accomplishment: The ultimate driver of board evaluation is the desire to add value to the accomplishment of the organisation’s strategy. If one believes that all governance practices should align and contribute to corporate strategy and mission, then this driver is a given.

A board is usually not seeking to accomplish all of these objectives during a single annual evaluation process: it is important to clarify which are and which are not sought after. Regardless of the motivation or the previous results, board evaluation, done well, promotes positive change and contributes to the creation of a road map to success for the whole organisation.

The pitfalls

Every corporate process comes with potential challenges and pitfalls. Here are the main pitfalls commonly experienced with board evaluation:

Unclear or unarticulated drivers: The drivers of the evaluation dictate the processes that will be used. When a board does not first clearly answer the question ‘why’ are we doing this, it should not be surprised if the evaluation ends up being a waste of both time and money. Take the time to fully understand and agree on why you are conducting the evaluation and what you really want to get out of it. The person identified to lead the process should consult broadly with directors and the CEO, listen and communicate about the right tool, criteria, scope and delivery mechanism to be used.

An exercise in compliance: Checking boxes to meet the letter of the law and missing its spirit may satisfy the rules and regulators, however it will not go beyond compliance to add value to the organisation. And it will leave directors, whose time and energy are at a premium, feeling frustrated.

Subjectivity: Because most evaluations are conducted via self-assessment surveys, these can quickly become very subjective. Based more on feelings than facts, subjective results can lead to misinformed solutions. Finding ways to include objective facts, like peers benchmarks, into evaluations can help.

Working on the wrong problem: There is a tendency in evaluation to focus solutions on the symptoms rather than the causes, often stemming from over-reliance on questionnaires. Boards receive basic reports outlining ‘answers’ to questions, pat themselves on the back for those that score highly and may even implement an action or two on those that rate lower. However, rarely do they correlate responses, consider ranges or look for underlying or related issues behind the ‘scores’. The result is actions that may address one problem but create, exacerbate or ignore others by not addressing the real underlying issues.

Lack of independence: Using internal resources, such as the corporate secretary or general counsel, to conduct board evaluations puts these individuals in a vulnerable position. These people rely on the board for their jobs, so face a dilemma when difficult messages need to be delivered. ‘Shooting the messenger’ is a common response. Having the board chair or other lead director report on the results also lacks an independent view of what is really going on and may actually feed undiagnosed dysfunction in the boardroom.

Lack of expertise and a disciplined approach: Would you rather have a doctor diagnose and treat your symptoms when you go for your annual physical or one of your colleagues at the office? Using an experienced external consultant or governance professional brings rigour, expertise, objectivity and peer benchmarks to the process and ultimately increases the evaluation’s impact. A caution, though – choose your advisor carefully for this very sensitive and impactful work.

Minimal investment: As the old adage says, ‘you will get out of something what you put into it’. When making decisions about how to use scarce financial resources, boards are tempted to conduct their evaluation ‘on the cheap’. A healthy investment of both time and money in board evaluation should actually pay off in terms of heightened efficiency and effectiveness and alignment of effort to strategy.

Using the wrong tool: Using the wrong tool for the job can create more problems than it solves. Two common examples are using peer evaluation of individual directors to get rid of under-performers or to address a division or faction on the board; and, using a broad survey questionnaire when what is really needed is a more focused and deep evaluation around a few specific issues. Link back to the drivers of the evaluation and match the tool to those.

Despite the pitfalls associated with board and director evaluation, which can be mitigated through effective methodology and implementation, there are significant benefits to be gained.

 

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The processes

Generally speaking, boards can choose from six tools for assessing governance effectiveness and conducting board evaluations: documentation reviews, questionnaires, interviews, behavioural observation, boardroom and executive team cultural analysis and group facilitated dialogue.

The tool you choose will depend on your drivers. Each tool tests and probes for differing aspects of structural, cultural, behavioural and relational governance and leadership issues.

Documentation best practices review: Governance guidelines, rules and regulations are constantly changing. Keep current with changes to your regulatory framework and evaluate compliance against it on a periodic basis. Using internal resources annually and every three to five years using an independent external reviewer is an appropriate approach.

Questionnaires: Using questionnaires is effective for comprehensive diagnostics and benchmarking (‘a mile wide but two inches deep’ metaphorically). But while a good way to ‘cast the net’, this approach is less effective at providing solutions than other approaches. Questionnaires are easy, non-threatening and unobtrusive for board members to complete. Generally, results are reported in aggregate, with any individual responses being kept completely confidential.

Interviews: Conducting interviews with directors and in some cases others (for example, the CEO and executive team) is effective for finding key issues and drilling to the heart of them. While this approach can lack an objective, comprehensive framework for analysis and benchmarking (‘drilling deep but not wide’ metaphorically), it generates richer diagnostics and suggestions for improvement.

Observations: Meeting observations bring objective insights. Conducted by an independent and trusted advisor, meeting materials are reviewed in combination with attendance at board and committee meetings as silent observers. Observations may include culture and behavioural analysis, an analysis of the materials, presentations, meeting effectiveness and chair style.

Facilitated dialogue: Engaging the board in a dialogue to shape consensus on the issues and recommendations builds needed momentum for process improvements and other governance enhancements. Using facilitated dialogue in combination with the other methods adds depth and rigour and focuses the board on key opportunities to improve.

Cultural analysis: Governance effectiveness can be viewed as the interplay among three aspects: governance structure, behaviours and culture. Cultural analysis moves the board beyond checklist governance approaches to understanding and adapting the cultural power drivers that impact the organisation’s governance choices and practices. Understanding underlying culture – those unwritten, often even unspoken norms upon which all else is built – is critical to governance success.

A robust board evaluation strategy employs all of these tools both in combination and rotation over time. A varied approach to evaluation keeps it fresh for directors, while at the same time is comprehensive, wide, deep and focused in scope.

The results

Perhaps the least well-done aspect of board evaluation, yet the most important, is taking corrective action:

  • Give shareholders, regulatory bodies and other stakeholders assurance that the board has undergone a rigorous evaluation, by disclosing the process
  • Disclose outcomes and changes to owners of the evaluation: the board and the senior management
  • Communicate with and coach individual directors in filling identified performance gaps. It is common for the chair to take the lead in this
  • Use the results to feed into the board succession and renewal process, if this was one of your drivers
  • Identify skills gaps, resource and undertake training and development opportunities
  • Institute appropriate changes in any area where the board and directors are not fulfilling their legal and governance responsibilities
  • Use the results to feed into next year’s planning process, objectives, priorities and resource allocations, and board and committee work plans

Evaluations, like our annual physical check-up with our doctor, only provide real value when the advice of the doctor has been followed! Begin with what is driving the evaluation, mitigate against the pitfalls, choose the right tools for the job, and then take action!

 

About The Author:

Debra Brown is the founder, President and CEO of Brown Governance Inc.  Since founding BGI in 1991, Debra has developed it into a full-service firm providing governance consulting, research, training and tools.  Additionally, Debra is the founder and a lead faculty member of The Professional Director Certification Program™, a world class, online director education and certification program.

Currently, Debra serves on major international boards, and has worked in corporate governance in North America and as far afield as Malaysia, Bahrain and Guatemala.  She is an acknowledged and sought-after thought leader in corporate governance, authoring over two dozen major research articles published in Canada and internationally. Prior to forming Brown Governance, Debra spent several years in the Canadian financial sector, working most recently as CEO.